Khalim was the last true [Zakarum] priest who battled against the corruption of the Act 3 boss. He was murdered and then butchered, with various portions of his body hidden in strongholds across the land.
In Diablo II you must gather them all and then combine them with the Horadric Cube. As you can see in the image here, you need to gather Khalim's Flail, along with his heart, eye, and brain, and then click the Transmute button, which makes a pretty little graphical effect, and leaves you with just the Flail, which is slightly altered in appearance. It's quite a useful weapon, but you can't use it for long, since you need to destroy it when you smash the Compelling Orb, breaking the spell that has the enemy Zakarum on the surface attacking you. The destruction of Khalim's Will is also required to open the stairway down to the Durance of Hate, where you must go to finish Act Three.